In December, Power REIT purchased the land under the
5.7MW True North Solar Farm in Salisbury, MA. Photo
Source: Power REIT

HASI, on the other hand, has market capitalization approximately
ten times larger than PW, and traded over five million shares on
its first day. That is about as many shares as PW trades in nine
months. HASI’s liquidity will fall as its shares enter the
hands of long term investors, but the company will remain far more
liquid than PW.

About Hannon Armstrong

Hannon Armstong has long been a leader in financing sustainable
energy projects. The company is a fixture at clean energy
financing events, and its partners have impressed me with their
level of knowledge in our conversations at such events.

By going public and converting to a REIT structure, HASI is
tapping a pool of relatively low-cost capital from small
investors. Many small US investors have previously had few
opportunities to invest in sustainable infrastructure. The
most comparable investments I know are
solar-backed loans from Solar Mosaic, and PW. Those
few of Mosaic’s loans available to small investors sell out
quickly, and are currently limited to investors in California and
New York State. Further, these loans cannot be purchased
within a retirement plan such as a self-directed IRA. HASI
will have none of these problems; I have purchased small amounts
of HASI in IRAs and a brokerage Health Savings Account which
I manage. REITs are particularly suited as investments in
such tax-sheltered accounts because their distributions are not
“qualified dividends” and are taxed as income. The interest
on Mosaic loans (4.5% on recent offerings) is also taxed as
income, but cannot be purchased in a tax-sheltered account.

Hannon Armstrong’s business is arranging finance for sustainable
energy projects. Jeffrey Eckel, the company’s
President and CEO defines these as projects of
sufficient quality which reduce carbon emissions. Such
projects include the installation of sustainable HVAC equipment as
well as (potentially) clean energy generation such as solar and
wind farms. Such projects are not the typical investment
which you would normally expect to find in a REIT, but there has
been some ambiguity regarding how photovoltaic solar and similar
infrastructure should be treated.

In an interview, Eckel told me that the IRS issued a private
letter ruling detailing exactly what types of such infrastructure
HASI will be able to invest in and maintain REIT status in July
2012. The issue of what sorts of
renewable energy projects are suitable for inclusion in a REIT
is of great interest among developers and financiers over the last
few months. Joshua Sturtevant, an Associate with solar
aggregator, financier, and developer Distributed Sun of
Washington, DC, tells me that “based on its historic approach to
issuing private letter rulings, I am skeptical that the IRS will
go far enough in any of the new rulings to enable broad-based
direct investment in development-stage solar projects. Some of the
existing rulings could conceivably benefit certain individuals who
are making requests to address specific boutique structures, but
it is not likely that anything that has been issued will lead to
the sea change that many in the industry are hoping for. ”

In the event, Sturtevant may have been too pessimistic.
Not only did HASI request and receive their ruling before
many industry observers were even talking about the possibility,
but it seems to be quite comprehensive. Eckel has not been
forthcoming about its contents: He told me, “
We’re keeping the ‘private’ in ‘private letter ruling.’” However,
he did say that, while the ruling is very specific to what Hannon
Armstrong does, it allows the company to continue its existing
business investing in solar, wind, geothermal, and energy
efficiency infrastructure as a REIT.

All that means that solar, wind, and geothermal can be suitable
REIT assets. Since Hannon Armstrong does not have to
significantly change the way it structures deals and manages its
portfolio, other REITs may also be able to make similar
investments without a prohibitive number of convolutions.
More details of the exact requirements will emerge as more
PLRs are issued, and when HASI’s ruling is published by the IRS.

HASI as an Investment

Now that the IPO is complete, HASI intends to invest the funds in
eight sustainable energy projects which they have lined up and
ready to go. Eckel told me that they
expect their investment mix will not change
significantly now that they are a public REIT, so we can expect
these new projects will roughly mirror their current
portfolio of managed assets.

Roughly a third of the projects will be invested in renewable
energy such as solar, wind, biogas, and geothermal, with the
balance in energy efficiency projects and other sustainable
infrastructure. Because Eckel specifically mentioned
“baseload renewables such as geothermal” as a sector he is
particularly excited about, I would not be surprised if at least
one of the eight initial projects is geothermal.

If HASI funds multiple geothermal projects over the next few
years, this could be excellent news for geothermal developers with
projects in the United States, such as Ormat (NYSE:ORA),
Ram Power (TSX:RPG,
OTC:RAMPF), and US Geothermal (NYSE:HTM).

Likely Dividend

Hannon Armstrong is still in a quiet period because of their
recent IPO, so Eckel was unable to tell me anything
about their likely earnings prospects or planned
dividends. We do know that the company earned $0.60 a share
in 2012, and that they intend to distribute 100% of their REIT
earnings as dividends to shareholders. REIT earnings are
defined by the IRS, and will differ in some respects from the GAAP
earnings. In addition, the IPO has increased HASI’s share
base six-fold, meaning that the profitability of the new
investments will dominate earnings going forward.

That said, the mix of HASI’s projects will not change going
forward. The main difference will be that the
improved ability to raise equity means that the REIT will
retain a larger stake in projects it finances. This could
increase earnings per share if it allows more profitable deals
which might not have gone through without HASI having skin in the
game, but it could also dilute earnings if the income HASI earns
by managing projects is diluted over a larger equity base invested
in the projects themselves. That said, HASI’s partners would
not have taken the firm public if they thought it meant they would
earn significantly less than they would have had the firm remained
private.

One other factor to consider is the pricing of the IPO.
HASI priced at the low end of the $12.50 to $17.50 range in
the prospectus. Because of that, they will be able to invest
less new money per share than they could have if it had priced
higher, which will lead to lower earnings per share than we could
have expected at a higher IPO price. On the other hand, new
investors are paying less for the earnings from HASI’s existing
business. After dilution from new equity, 2012 earnings
would amount to approximately ten cents a share. According
to the April 19th prospectus
update, HASI netted $9.70 per share from the IPO, after
dilution of the new money and estimated expenses. Assuming
they can invest this at a yield between 5% and 8%, we can expect
total earnings per share to be between $0.58 and $0.87 per share,
all of which we can expect to be distributed as dividends.

At the current price of $11.25, HASI will have a dividend yield
of between 5.1% and 7.7% if my assumptions are correct. A
quick survey of the top 10 holdings of the SPDR Dow Jones REIT ETF
(NYSE:RWR), shows that these REITs yield between 2.6% and 4.2%, so
I expect HASI will appear attractively priced in comparison to
other REITs when it starts paying dividends, assuming it does not
appreciate before then. It should also be attractively
priced in comparison to the green infrastructure investments I
mentioned earlier: Loans from Solar Mosaic yielding 4.5% and Power
REIT, which yields 3.9% at $10.20.

Conclusion

I can’t help but be enthusiastic about Hannon Armstrong
Sustainable Infrastructure Capital. The REIT presses all my
buttons:

DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.